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Roth 401(k) deferral contributions are similar to traditional 401(k) deferral contributions in that employees may defer a portion of their pay into the Plan. However, Roth 401(k) deferrals are not tax-deferred contributions, meaning the contributions are included in taxable income in the year they are contributed. These contributions are then excluded from taxable income in the year the employee withdraws them from the account.

Investment earnings on voluntary Roth deferrals will grow tax-deferred. If the individual withdraws the account at least five years after they began contributing Roth 401(k) deferrals and they are least 59 ½ years old, the investment earnings will also be tax-free in the year of the withdrawal – essentially, the employee never has to pay taxes on the earnings if these conditions are met. If the individual withdraws their account early (before age 59 ½ or before the Roth 401(k) account has been open for five years), the investment earnings will be considered taxable in the year of the withdrawal.

An employee’s combined Roth 401(k) deferrals and traditional 401(k) deferrals are subject to the IRS annual contribution limit. For the 2024 plan year, the limit is $23,000. An individual over the age of 50 may also contribute an additional $7,500 in catch-up contributions, for a total voluntary employee contribution of $30,500.